iQiyi Pre-IPO Analysis

IQ vs. Netflix

iQiyi Pre-IPO Analysis

The firm many have been calling the “Netflix of China” is actually named iQiyi (ticker $IQ).

Morningstar gives the following description, “iQIYI Inc is an online entertainment service provider in China. It is primarily engaged in providing a variety of services encompassing internet video, live broadcasting, online games, online literature, animations, e-commerce and social media platform. The company produces original video content and distributes appealing professionally-produced content, partner-generated content, and user-generated content. It also offers a diverse collection of internet video content that appeals to users from broad demographics. The company’s revenue is generated from membership services, online advertising services, and content distribution. The company earns the majority of its revenue from China.”

The Chinese market isn’t solely $IQ’s but they do hold a large share. The following comes from the firm’s F-1 filing, “In December 2017, among video streaming services, we had 32.8% total time spent market share on mobile app, and 31.2% total time spent market share on PC, according to the iResearch Report. We have consistently ranked No. 1 since July 2015 in terms of combined PC and mobile video streaming total time spent market share, according to iResearch. Through our license partner, we also operate the largest smart TV video streaming service in China as measured by monthly active devices in December 2017, according to the iResearch Report.” The largest competitors to $IQ are powerhouses in their own right, Tencent Video and Youku Tudou. With the Chinese discretionary income rising, technology advances still occurring and potential for $IQ to raise subscription fees, the future may be bright for all three players in the field.

The first fundamental aspect of $IQ to note is the incredible top line growth $IQ has seen for the recent quarters that the public has financial data available for. Below is a graph from Bloomberg showcasing the revenue segments of the firm for the last six quarters.

IQ growth

The orange line represents the total revenue per quarter which reached about $700M last quarter. The revenue is close to evenly split between online advertising and membership subscriptions, with a smaller portion coming from content distribution and an “other” category which houses revenue from live broadcasting, online games and online literature.

Since the firm was established in March of 2010, there isn’t a lot of data out on the firm. However, for being such a young firm, the platform has certainly shown positive signs that it could be a major industry leader in China, amassing over 50M paying subscribers as of 2017Q4.

iQIYI

It’s no wonder why analysts are comparing the firm to Netflix; the industry is still growing and both firms can do well in their respective target markets. iQIYI is attempting to take hold of the Chinese market and that is an area where Netflix has encountered large barriers of entry. In fact, the two firms have a deal in place for several Netflix shows to be streamed on the iQIYI platform including Black Mirror and Stranger Things. http://money.cnn.com/2018/02/28/technology/baidu-iqiyi-netflix-china/index.html

Another noteworthy finding is the ownership of $IQ. The firm spun-off from Baidu and Baidu kept the vast majority of voting rights; meaning shareholders will not have any true say in the company affairs any time in the near future (or possibly ever). On the other hand a very successful firm, Hillhouse Capital Management, has taken a large stake (over 12M shares). Hillhouse was an early investor in two highly successful Chinese firms JD, Tencent and averaged 52% annualized returns from their inception in 2005 to 2012. https://en.wikipedia.org/wiki/Hillhouse_Capital_Group , http://www.hillhousecap.com/

From my experience, debt and valuation are the largest potential pitfalls of investing in startups. $IQ has a reasonable debt load of 91M as of 2017Q4, however this is a figure that could very well increase as they attempt to take market share in the years to come. Instead of packing on debt, the firm has raised capital from issuing private and public equity. The most attractive fundamental multiple of $IQ has to be their price to sales ratio which according to Bloomberg stands under 4 (Netflix has been as high as 12 and stands at about 9 currently).

The small cap is a high risk- high reward foreign growth stock. It is very far from being a stock for the faint of hearted and I wouldn’t recommend it to everyone by any means. I made this a very small 1.2% of my portfolio and may increase it to a maximum of 5% if I like what I see from their earnings report scheduled for 4/26/2018.

Sources:

  1. Bloomberg Terminal
  2. iQiyi website: https://www.iqiyi.com/
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